Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to d
ID: 2597232 • Letter: K
Question
Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $22,000 for 960 shares of Malti Company’s common stock. She received a $787 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $20,000. Kathy would like to earn a return of at least 13% on all of her investments. She is not sure whether the Malti Company stock provided a 13% return and would like some help with the necessary computations.
Required:
1. Compute the net present value that Kathy earned on her investment in Malti Company stock using Excel.
2. Did the Malti Company stock provide a 13% return?
Explanation / Answer
Year(s) Amount of Cash Flows 13% Factor Present Value of Cash Flows Purchase of the stock Now -22000 1 -22000 Annual cash dividends 1-3 787 2.361 1858 Sale of the stock 3 20000 0.693 13860 Net present value -6282 2 No the Malti Company's stock did not provide a 13% return
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